The Santa Clara, Calif.-based chipmaker
NSM, -2.68%
predicted sales for the three-month period ending in August would slump 4 percent to 5 percent from $571.2 million in the prior quarter, meaning sales could fall well short of analysts' current estimates.

Doug Freedman, an analyst with American Technology Research, said that while the news was "not necessarily expected," he was also not surprised by it.

"I've been hearing that the distribution channel had significantly overbooked and was trying to control inventory and that was going to cause National a problem because they are not known for diligent management of their distribution channel," Freedman said. "I view this as a sale management problem, combined with end-market issues that have started to show up."

However, the analyst praised the company's previous moves to prune much of its lower-margin products.

While some on Wall Street may be looking for the company to revert to a net loss when its business or the market takes a turn for the worse, Freedman said he thinks "this National is different and the products can maintain their margins."

"I'd actually rather see a sales decline than a gross margin decline, that the company is not attempting to sell low-cost products just to beef up the top line and lower the environment for the overall analog market," he said.

After speaking with company management following the reduced outlook, Freedman said he expects gross margins should remain relatively flat in the first quarter.

In the fourth quarter, gross margins gained to 54.4 percent from 44.6 the prior year. The company had expected gross margins to improve in the first quarter.

"I was looking for gross margin creep up a little bit," Freedman said. "Without the revenue growth [and] stability I think the upside in gross margins will be hard [to achieve], but I do think it's possible that gross margins remain flat."

Freedman said he plans to review his "buy" rating on the stock.

Quarterly sales to fall short of Wall Street hopes

Based on the company's predicted decline, sales could now sink as low as $543 million.

National Semiconductor had previously predicted quarterly sales would be flat to 3 percent higher compared to the prior quarter.

The average of analysts' estimates currently calls for quarterly earnings of 31 cents per share on sales of $583 million, according to a Thomson First Call survey.

The company had expected its turns orders -- those placed for delivery within the same quarter -- to decline, but said the decline was "much more significant" than it had anticipated.

In addition to the slower orders and inventory adjustment at its distributors, National Semiconductor said growth rates for flat-panel displays softened and demand from certain Chinese wireless handset makers was weaker than it had anticipated.

"Our original revenue guidance of flat to up 3 percent was based on higher opening backlog offset partially by lower projected turns," said Chairman Brian Halla.

"But with turns orders being substantially less than we expected, our summer quarter revenues will trend down four to five points sequentially."

The company plans to release its full results on Sept. 9, when it also plans to provide an outlook for the second quarter.

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